DISCUSSION: SEC: HYIP Defendant ‘Absconded’

Editor’s Note: This thread is designed to promote discussion on the practical value of the “rebates aren’t guaranteed” argument as applied by AdSurfDaily and other autosurfs. Does the argument hold any water? And could it be applied — and have a prayer of succeeding — in other situations in which federal agencies brought allegations of fraud? Lower in this post you’ll read about a case in which the SEC said an HYIP purveyor “absconded” with investors’ funds. It’s not an autosurf case, but some surf owners do abscond with funds. Could a “rebates aren’t guaranteed” or “returns aren’t guaranteed” defense insulate autosurf and HYIP purveyors from prosecution?

Lots of AdSurfDaily members have defended Andy Bowdoin and the company’s business practices by saying “rebates aren’t guaranteed.” Prosecutors see the argument as wordplay to disguise the Ponzi nature of surfs and to insulate surf companies from prosecution for fraud, among other crimes.

“Rebates aren’t guaranteed” is the highly presumptive ace-in-the-hole  surf companies use to wipe away liabilities with a single keystroke. Money is collected with a promise or suggestion of a return. The surfs typically become insolvent virtually instantly because incoming money from members typically is their only significant revenue stream. There is no real way to offset liabilities created by the promise or suggestion of a return, so they use wordplay — “rebates aren’t guaranteed” — to ignore the liabilities side of the ledger.

None of the autosurfs the government has taken action against has been able to demonstrate solvency, including ASD — and yet ASD, in classic Ponzi style, was making payouts up to the very end. It did so by taking money from new members to pay off older ones. That’s dangerous enough, but there is an even greater danger.

The greatest danger of “rebates aren’t guaranteed” as practiced by ASD and others is that it creates a license to steal from top to bottom within an autosurf enterprise. If surf operators got their way, a prosecution would be an impossibility. No victims would exist because of wordplay — and no one ever could hope even for a partial refund because of contractual disclaimers.

Bowdoin — or any surf operator, insider or promoter who used the same language to present an offer — could simply drift off into the sunset with the cash, leaving victims with no remedy. People could set up surfs with the express purpose of collecting cash and disappearing with the money by citing “rebates aren’t guaranteed.”

Below you’ll read about an April 22 case from the world of high-yield investment programs (HYIPs) that features allegations of an enormous theft from investors. Read the summary and ask yourself if a preemptive disclaimer aimed at shielding the company from prosecution on fraud or theft charges ever would be taken seriously by a judge.

If you arrive at the conclusion that such a defense would fail, ask yourself why so many autosurf enthusiasts — Bowdoin supporters included — seem to think that such a defense is a magic bullet. HYIPs, online or offline, are close cousins to autosurf investment schemes because of the promise or suggestion of enormous returns.

Summary

The Securities and Exchange Commission has accused David Praise, Noel Kamanga Mwangi, Martin A. Burke, and William F. Dippolito of conducting two fraudulent high-yield securities offerings between August 2007 and August 2008.

Prosecutors said the defendants raised $14.7 million in the twin schemes, taking advantage of investors in the United States and Canada.

In the first offering, “Praise represented that investors could make $15 million for every $1 million invested through a so-called ‘buy-sell’ trading program involving foreign bank instruments,” the SEC said.

“But no ‘buy-sell’ transactions ever occurred,” the SEC said. Instead, “Praise and others absconded with the funds.” (Emphasis added.)

The initial scheme fetched $12.2 million. It worked so well, that Praise and one of his co-defendants did it again, the SEC said.

“In the second offering, the Commission alleges that defendants Burke and Praise told an investor that a company Burke controlled had arranged to purchase a 500 million euro ‘medium-term note,’ which they would use to support a trading program,” the SEC said.

“Burke and Praise told the investor he would receive $10 million in 30 days, plus trading profits over the next year,” the SEC said. “At their direction, the investor deposited $2.5 million into an account controlled by defendant William F. Dippolito, a Tacoma, Washington attorney who the Commission charged with fraud in a similar fraudulent scheme in 2007.

“The funds were never used as Burke and Praise claimed,” the SEC said. “Rather, Dippolito, at defendant Mwangi’s direction, sent the funds to Mwangi, entities Praise controlled, and others.”

Praise, Mwangi and Burke were charged with securities fraud. Dippolito was charged with aiding and abetting Praise, Mwangi and Burke’s violations.

And the SEC also is trying to force the return of money paid out in the scheme, saying it amounted to ill-gotten gains.

Named relief defendants “because they received investor funds for no consideration” were Marinco Inc., China Infrastructure Capital Management Inc., Werner Buettiker, Gabrial Pennicott, Cynthia Pennicott, Salomon Bassim, William Lenz, Lenzburg Capital Corp., Integrated Technologies Group Inc., Investor Select, A.G., Robert Justino, Kismet Cyriacks, Zara Akbar, Dr. Brian P. Killian and William R. Chapman.

“As to these relief defendants, the Commission requests disgorgement of their ill-gotten gains, with prejudgment interest,” the SEC said.

Under the theory of “returns aren’t guaranteed” or “rebates aren’t guaranteed” as advanced by autosurf promoters, each of the defendants mentioned above could escape prosecution simply by structuring a contract that insulated them from fraud charges and created a license to steal. A court never could order the return of ill-gotten gains from relief defendants because of wordplay.

Any HYIP operator — online or offline — or any autosurf operator could accept cash from customers and simply decide to keep it. They could buy cars and boats, give money to friends and family and be completely shielded from prosecution by citing “returns aren’t guaranteed” or “rebates aren’t guaranteed.”

Even people disinclined ever to take money would get a free pass if the allure of the “rebates aren’t guaranteed” protection become too much and they submitted to temptation. As long as they had a disclaimer, any person could issue a security at any time and simply keep the cash, hamstringing both investors and prosecutors.

In our view, the license to steal created by “rebates aren’t guaranteed” is the core danger of autosurfs. Surf enthusiasts argue, of course, that their favorite surf operator never would run with the money.

But that’s beside the point. If prosecutors didn’t act or if a court gave its approval to “rebates aren’t guaranteed,” global theft factories would spring up overnight. Once the target theft amount was met, the thief simply could walk off with the money, citing the “rebates aren’t guaranteed” protection.

About the Author

8 Responses to “DISCUSSION: SEC: HYIP Defendant ‘Absconded’”

  1. Interesting point Patrick.

    “Rebates arent guaranteeed” – however Andy Bowdoin went up on stage and spoke on live calls more than a couple of times to assure members that the rebate system of ASD was going to continue forever. Bob Cefail made the comment that it might end and Andy Bowdoin went back onto a call to correct him. How many times has he been heard to say “the rebates are how we started and are how we will carry on”

    This is the key – the rebates may not be guaranteed on paper in the ToS, but they are invariably guaranteed in other statements, both written and verbal, in all this type of scheme. They always say that “this programme/scheme/business is a long term business” They nearly always say that they are not ponzois or “are protected from the SEC” (Like a legitimate company with a legitimate product needs to tell its customers that it is legitimate?)

    SO “NOT GUARANTEED” ON PAPER, BUT IN ALL OTHER MATERIAL WAYS THE GUARANTEE IS IMPLIED, IF NOT ACTUALLY PROMISED.

    Of course this should never be accepted as a legally protective disclaimer to free people running these programmes from liability. And, in any event, how can the ToS of a company that is not a legal business be relied on anyway.

      (Quote)

  2. Hi alasycia,

    alasycia: “Rebates arent guaranteeed” – however Andy Bowdoin went up on stage and spoke on live calls more than a couple of times to assure members that the rebate system of ASD was going to continue forever.

    Yes, indeed — and one such instance is cited in an exhibit in the August forfeiture complaint:

    “I’ve asked the question, time and time
    again – ‘Andy, are you ever going to
    reduce rebates?’ Folks, this is what’s
    built the company. It’s a very unique
    concept we have here, and rebates is
    what makes it happen. This is what
    creates the members, that creates the
    interest for the national advertisers.
    And right now we’re at the point where
    national advertisers are looking. We’re
    brought on Joseph to head this division
    up for us, so we can start bringing
    national advertisers in, and 50% of
    what you saw up here, of the income
    will go right back into rebates.”

    alasycia: And, in any event, how can the ToS of a company that is not a legal business be relied on anyway.

    Good question.

    Patrick

      (Quote)

  3. good points alasycia, I’m glad someone remembers the panic that ASD went though when Bob started to do his live webcasts and tell people “that anyday the rebates would stop but you would be grandfathered in.” Maybe alasycia you did not join yet but the same thing happen when Garner did his legal statement video with Andy. He said the same thing about nothing being guaranteed, and Andy calmed everyone down.
    hey Pistol, I know you have no time for people who invested in ASD to make to good to be true money. What do you think of the guy with the 2.5 mill? lol

      (Quote)

  4. Ponzi’s are generally prosecuted under the statutes governing mail fraud, wire fraud, etc…..and selling unregistered securities.

    So what it a “security”? You have apply the “Howey Test”.

    http://supreme.justia.com/us/328/293/case.html

    Basically, if you forward funds, in any manner, and expect to receive more in return through the work of others, you have a security. You can call it a gift, loan or a pink polka dotted bazooka, it makes no difference. The key is the “expectation” of a return through the efforts of others. Surfing of “advertisements” by a captive audience is just the latest “boil water and tear up bedsheets” tactic of Ponzi promoters that try to give the illusion of a a legitimate program.

    You can sell securities but they have to be registered, both with the feds and in each state.

      (Quote)

  5. Mark,

    I joined with the original AdSurfDaily and pre Garner. lol In those days, joining with over 1000$ was unusual, until the marketers (or Patrick’s steroidal puppeteers) moved in, and yes I remember it well. If anyone even hinted that this might not be forever, Uncle andy would be right there making sure that we knew that it was not the case.

    Aaaaaaggghhhhhh. I don’t believe it – we believed it! lol

      (Quote)

  6. hey Ayasycia, how about cheering like a fool when andy gave away 100,000 ad pacakages to bob the vollyball player at the convention. We just saw a $125,000 liability and we stood there like a bunch of idiots!!! I also hear that if you helped at a rally like help take paperwork Andy gave 5,000 ad packs.. So in one day of work you made $6250.00, I could use that job !!!

      (Quote)

  7. Mark kreiling

    hey Pistol, I know you have no time for peoplewho invested in ASD to make to good to be true money.What do you think of the guy with the 2.5 mill? lol

    Not a lot but to be honest I see no difference between somebody who scammed 2.5 million and someone who scammed 2.5 thousand or 2.5 hundred. They are all greedy bastards who hoped to gain at someone elses expense.

      (Quote)

  8. OK, I’m the guy you’re all talking about here. Let me set the record straight.

    This ended up being a Nigerian fraud scheme with a twist. I was told the capital was from a hedge fund that wanted to invest in Kenya and in my company. I was introduced to the “chairman” of this “hedge fund” by an acquaintance that knew I was looking for alternative funding.

    So, these guys say they want to use $2.5M to leverage a larger investment with greater return and state that it’s their cash. The cash shows up in the account and they gave me instructions on where to send it to their “attorneys” in Europe.

    Bottom line: Once the cash is gone, I started to get calls from people I’d never heard from asking where their cash was. Once I realized what was going on, I was able to save another group of investors by rejecting their transfer of an additional $2.5Million.

    My attorneys advised me to plead the fifth, so the SEC didn’t get to hear my side of the story and lumped me in with these other jerks.

    So, I too am a victim of fraud, as well as an unknowing/unwilling accessory to fraud. My intent was NEVER to defraud anyone. What goes around comes around. Now you have the other side of the story.

    Be very wary of people that offer to make you part of any sort of investment or business, because you’re likely being told something different than the people putting up the money.

    ==NK Mwangi==

      (Quote)

Leave a Reply